Business and management

Barclays’ LIBOR embarrassment

Eagle fried

WHEN a trader asks a colleague to submit false information in order to boost his profits, the correct answer is not “done...for you big boy”. This response was one of a host of exchanges involving 14 Barclays traders that were revealed this week as part of a probe by Britain's Financial Services Authority (FSA) and American agencies including the Commodities Futures Trading Commission (CFTC) and the Department of Justice (DoJ).

The probe relates to LIBOR, the London inter-bank offered rate. LIBOR is supposed to be a trusty financial yardstick, measuring the costs banks face when they borrow from one another. Set each day, LIBOR determines the prices of loans and derivatives contracts worth several multiples of global GDP. The flaw in the system is that banks can estimate their own LIBOR rates. Although these estimates are supposed to be calculated by a team that is ringfenced from other parts of the bank, the probe shows that they were influenced at the behest of Barclays' traders.

Back in 2006 the Barclays staff involved had little thought for the wider ramifications of distorting LIBOR. They had more important things on their minds, like champagne. Asked to fudge the numbers by a competitor bank, Barclays acquiesced. The grateful reaction: “Dude. I owe you big time! Come over one day after work and I'm opening a bottle of Bollinger.”

The traders involved were those placing bets on interest-rate derivatives. These contracts are large enough—the total market was worth $554 trillion in 2011—that small price changes can mean big profits. Indeed, other messages revealed that for each basis point (0.01%) that LIBOR was moved, those involved could net “about a couple of million dollars”. Given this sort of payoff, one bottle of Bollinger seems a bit mean.

For Barclays, this is beyond embarrassing. The e-mails—the FSA tracked 257 messages asking for LIBOR and its yen and euro equivalents to be altered—make painful reading. The fact that the investigation involved the FBI is a reputational disaster in itself. To its very slight credit, Barclays has not blamed this on rogue traders: its CEO, Bob Diamond, and other senior executives have positioned this as a failing of the bank as a whole. Mr Diamond and three other senior staff have volunteered to forgo their annual bonus this year.

The savings will not offset the fines Barclays has been handed. The bank received a £60m ($93m) fine from the FSA, the biggest ever doled out by the regulator (even after a 30% reduction because Barclays co-operated). This number still pales beside the penalties imposed by the CFTC and DoJ, which brought the total fine to £290m, around 10% of pre-tax profits in the bank's most recent financial year.

The share price actually rose on news of the settlement: investors presumably hope this will draw a line under the LIBOR investigation. But the FSA's report includes a mine of information on exactly how and when LIBOR was being manipulated. This will be useful for claimants in civil cases being brought against Barclays in America, says Anthony Maton of Hausfeld, a law firm representing claimants there. Barclays is also likely to face new civil cases, including in Britain, as customers on the wrong side of LIBOR movements bring claims.

Other banks have reason to fret. At least 12 banks are involved in LIBOR investigations around the world: the Barclays fines may herald similar penalties for other lenders. More disturbing still, if banks did distort money markets then they affected anyone with a LIBOR-linked contract. That would open them up to claims stretching far beyond their own customers.

What Barclays employees did is downright criminal. As other commenters have said, prosecution and jail terms should be the consequence. To describe it in terms only of embarrassment and loss of reputation shows that Schumpeter's morals are seriously awry.

If I steal £100 from someone's bank account and am caught, I will be justly branded a cheat, have a criminal inquiry against me and most probably end up in jail. If I on the other hand am a trader at a bank, routinely skim off hundreds of thousands of pounds from the taxpayer by rigging rates, I will be patted on the back by senior bank management for raking in profits, have a stonking year-end bonus, be invited to politicial parties fund-raising dinners, and just in case I am caught by some over-zealous regulator will have the politicians lining up to educate the people how much I have contributed to the British economy in taxes, how it is people like me who will help Britain create jobs and why the masses who do not understand the complex banking system should really cut some slack to hardworking, job-creating bankers like me. Welcome to reality.

The UK's authorities insist that they are unable to impose any greater penalty than its laughable £60m fine.
Yet under English law any person obtainig pecuniary gain by deception is guilty of a criminal act.
The City of London became a world class trading centre based upon its probity and 'My word is my bond.
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With its recent criminal behaviour, and activites which are legal in The City, but banned under almost every other financial administration, The City has become a cesspit of corruption for the world.
Why else would so many of the world's financial scandals be carried out by the UK arms of international businesses.
Where are the police, pour encourager les autres?
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Unbelievable, I steal 5000 sterlings from a bank and I will be thrown in jail for 10 years. Banksters steal hundreds of millions and Schumpter only sees it as a mere embarrassment to their banks. These thieves should go to jail.

They make TARP look like a seasonal adjustment of the US government's running costs.

I give credit to the Economist for having reported some of the finance industry's worst offences, but I do find its ratio of bashing governments (European ones in particular) to bashing corporate greed and irresponsibility, if not downright criminal activity, of this magnitue quite imbalanced.

There are many valid reasons to harangue many governments for their many policy failures, but the private sector in general, and its financial wizardry branch in particular, seem to attract far less than their due blame from the Economist.

The general moral depravity of bankers is such that there needs to be a root and branch clear out of bankers and especially bankers who trained in New York.

They almost brought the world banking system to within a couple of hours of complete collapse, and if they had we all would have been running on the Stone Age barter system.

London used to have bankers to whom 'my word is my bond': Mrs Thatcher and the US 'investment (ie casino) banks have brought in their New York barrow boy huckster mentality and it ranges across Jamie Dimon and previously blue chip JP Morgan through to huckers all Goldman Sachs.

Time to end this temporary nightmare with these hucksters who are now as (dis)respected and loathed as lawyers and alongside used car dealers.

I say this as a Chartered Accountant and long time appalled at the banks managements' total immorality.

Time to get back some moral compass and stop subsidising each investment banker to the tune of £400M per investment banker and stop the crazy and hugely immoral bonuses made from gambling by trying to fix the cards and tables...

The sense of impunity enjoyed by the banking sector is simply sickening. If some Jack plumber would rob a bank (without weapons) he would certainly face justice and most likely jail term, nothing wrong with that. For these banking hot-shots justice is just another commodity and it is so because the ruling class perfectly permits it (see how the UK government fiercely rejects further regulation in the City). This will never end and sadly the ones who carry the bill from this reckless behavior cannot do anything about their fate.

It does not take the brains of an Nobel Prize winner to notice that a bank's LIBOR submission is high relative to others. Just look at how many times it is left out of the group whose rates are averaged to produce the day's rate. There has always been some difference in credit rating between the contributor banks, and you would expect those with a better credit rating to access money more cheaply. Barclays was left out of the fixing because its rates were too high far too many times for it to be coincidence (my observations concern £ LIBOR). This wasn't just happening between 2005 and 2007, but for as long as I can remember, and I started working in the interest rate derivatives markets in 1985.
The entire interest rate market knew of this, so to say that it was a surprise to anybody but immediate desk heads at Barclays is preposterous. And to imagine that the Bank of England was unaware of this (and the efforts of a few more banks which will shortly come to light)is equally ridiculous.
Was there systematic collusion? There didn't have to be, just a number of banks with the same incentive. Exactly what that incentive was, we would occasionally speculate upon, but it might have had something to do with syndicated loans, where rates were reset quarterly. The higher LIBOR was relative to the rates that the banks actually funded themselves, the more money they made. The fact that the LIBOR "market" was such a flimsy concept provided a convenient smokescreen.
As the £ trader at a European bank I felt that I had one hand tied behind my back. If you would like to hear about another part of the money market where there was everyday fraud and collusion right under the Bank of England's nose, then I'm sure that will be oozing from the woodwork very soon.

A fine punishes the shareholders.
What about the "responsible" executives?
Shouldn't they be fired, their bonuses clawed back and be banned from ever having a job in finance?
Shouldn't they face jail terms?
This is fraud!
When are the culprits going to be punished?